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Compliance with What? Conflict Minerals Due Diligence (Part II)

Oct 28, 2011

As I explained earlier this week, the U.S. Securities and Exchange Commission (SEC) is in the process of formulating the rules that will implement Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010. Much rests on the SEC creating clear and simple rules with which companies can comply quickly.

In doing so, the SEC should keep a couple of key principles in mind.

First, companies themselves are best placed to know about their supply chains and to take steps to solve problems they find, in other words to conduct due diligence. Any rules regulating conflict minerals due diligence should be designed to clarify for business what it means to do the right thing when it buys minerals coming from a war zone, to enable a business to continue operations that meet minimum standards, and, when those standards cannot be met, to suspend transactions or relationships, or withdraw from certain activities or places.

Second, the minimum international standards against which companies should be conducting due diligence are clear. The OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas spells out standards for conflict financing in a model company policy. It has been endorsed by OECD ministers, the United Nations Security Council and the states from the region, through the International Commission of the Great Lakes Region (ICGLR). The OECD Guidelines for Multinational Enterprises and the United Nations Guiding Principles for Business and Human Rights both make clear what is expected of business with respect to compliance with human rights standards (do not infringe on the rights of others, conduct due diligence to ensure this is the case, report on that due diligence in a transparent manner). The standards set by the SEC should ensure that companies exclude conflict minerals from their supply chains while at the same time not disadvantaging U.S. domiciled companies. The SEC would be wise to look to internationally harmonized standards as the way to do that.

Third, certification is not synonymous with due diligence. Due diligence is a way for businesses to implement their social responsibilities, comply with international standards and avoid breaking certain laws. Certification can form a part of the information upon which due diligence draws, but participation in a certification regime does not on its own release a company from its responsibility for its own actions in buying minerals. Nor should certification be mistaken for a solution to the problem of conflict minerals more generally.

Certification in the context of war and widespread violence is by definition problematic: state capacity is weak and reliable data and documentation hard to come by. As described in an earlier post, certification has proceeded through a number of initiatives (here’s a report on one such scheme by Partnership Africa Canada). In the context of the DRC, certification is a necessary step. But certification alone is not sufficient to ensure exclusion of conflict minerals from global supply chains, nor is it alone enough to constitute conflict zone due diligence by a firm.

Section 1502 is designed to enable consumers, investors, and regulators a level of transparency against which to assess a company’s behavior. That can only happen where the rules are clear and regulators do their job effectively. The time now is to put in place clear rules that tell companies what they have to do in order to ensure that their production processes and value chains are not harmful to the very people who help make the products.

One final note: In wars and other situations of widespread violence there is a heightened risk that commercial transactions are connected to human rights violations that are the equivalent of what would be considered violent or predatory crimes in the U.S. or in other jurisdictions. These include such acts as killing, extra-judicial executions, rape, torture, kidnapping, forced displacement, detention without due process, enslavement, and forced labour. At present no legally enforceable rule anywhere is specially designed to deal with commercial transactions linked to such crimes in times of war.

This is simply wrong. Just as it is an offense to pay a bribe to obtain an advantage, the purchase, sale, transfer, harbouring, or receipt of a good that is produced by means of such crimes should constitute an offense. Dodd-Frank is a step in the right direction, but it will make an even greater contribution if the SEC lays down some standards that separate legitimate business from the commercial links to crimes of war. The standards for doing that are already out there, in the international instruments named above.

Next week: are the costs of due diligence prohibitive?


Image: Lance Page / t r u t h o u t; Adapted: andrew.deci, Alin B., pinkorchid_too (Sandra))